Madoff Accountant Friehling Arrested in Ponzi Scheme

March 18 (Bloomberg) -- David Friehling, Bernard Madoff's accountant, was arrested and charged with securities fraud, the first accused accomplice to be named by authorities in connection with the money manager's $65 billion Ponzi scheme.

Friehling was sole proprietor of the Friehling & Horowitz accounting firm. The firm occupied a 550-square foot space in New City, a northern suburb of New York City in Rockland County, and served as auditor to Bernard L. Madoff Investment Securities since 1991, prosecutors said.

Friehling, 49, is not accused of knowing about the scheme. Rather, he allegedly deceived investors by falsely certifying that he had audited the financial statements of Madoff's firm. Besides securities fraud, Friehling is charged with aiding and abetting investment advisor fraud and four counts of filing false audit reports with the SEC.

"Friehling failed to conduct audits that complied with GAAS and GAAP," Acting U.S. Attorney Lev Dassin said in a statement, referring to generally accepted accounting principles and standards. "He did little or no testing, no verification of the 'facts' he certified. His job was not merely to rubber-stamp statements he didn't verify."

Defense attorney Andrew Lankler declined to comment. Friehling, who faces a maximum 105 years in prison, will appear in Manhattan federal court later today after surrendering to authorities this morning.

Meaningful Audit

Prosecutors said that as far back at 1995, Friehling lacked "professional independence" from his client by having an account at Madoff Securities with a year-end net equity of more than the $500,000 maximum amount allowed under SEC rules.

Madoff, 70, pleaded guilty on March 12 to defrauding investors of as much as $65 billion and is jailed at the Metropolitan Correctional Center in Manhattan. He faces 150 years behind bars for using money from new investors to pay off old ones in a global fraud that ran from at least the early 1990s. Prosecutors are seeking to seize more than $100 million in assets from him and his wife, Ruth.

In a criminal complaint, Keith Kelly, an agent with the Federal Bureau of Investigation, said there's no indication that Friehling conducted a meaningful audit of Madoff Securities. He didn't review material sources of firm revenue, examine a bank account through which billions of dollars of client funds flowed, or verify assets, liabilities or purported stock purchases, Kelly said.

Enabler

Peter Henning, a law professor at Wayne State University in Detroit, said in an interview that Friehling's arrest signals the government will prosecute Madoff workers even if they weren't expressly aware of the fraud.

"The government is saying he was an enabler that allowed Madoff to keep up the façade that he was running a legitimate operation," Henning said. "They're saying the accountant could have blown the whistle if he did his job but he didn't. A good accountant would have stopped this earlier."

Separately, the Securities and Exchange Commission filed a civil suit against Friehling and his firm in Manhattan federal court. The agency wants them to pay unspecified fines and forfeit "ill-gotten gains."

"Friehling essentially sold his license to Madoff for more than 17 years while Madoff's Ponzi scheme went undetected," said James Clarkson, acting director of the SEC's New York office, in a statement. "For all those years, Friehling deceived investors and regulators by declaring that Madoff's enterprise had a clean audit record."

Invested With Madoff

Friehling and his family members still had accounts at Madoff's firm with reported balances of more than $14 million as of Nov. 30, according to the SEC. They began investing with Madoff around 1980 and withdrew more than $5.5 million since 2000, the agency said.

Friehling was paid between $12,000 and $14,500 per month between 2004 and 2007, Kelly said. The SEC said he was paid $186,000 in annual fees.

Friehling at one time operated the Friehling & Horowitz firm with his father-in-law, Jerome Horowitz, a former outside accountant for Madoff who retired in the 1990s and moved to Palm Beach Gardens, Florida.

Neil Friedman, a Madoff investor who lives in Palm City, Florida, said in an interview that Horowitz had been Madoff's accountant for decades and also lost money in the scam. Horowitz died on March 12, the same day as Madoff's guilty plea, according to Lankler.

The case is U.S. v. Friehling, 09-mag-729, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net .